Source: PaxForex Premium Analytics Portal, Fundamental Insight
Caterpillar and its Japanese counterpart, Komatsu, stand as the dominant forces in the global construction and mining machinery markets. This makes the statements made by either company regarding their respective markets highly pertinent to the other. Consequently, Caterpillar investors have ample reason for optimism as they consider the company's performance in the third quarter. Here's the rationale.
While Caterpillar is primarily recognized for its prominent presence in construction machinery, a closer examination of its industrial segment profits reveals a noteworthy fact. The combined profits generated by its resource industries (encompassing mining and aggregate machinery) and energy and transportation segments are on par with those of its construction industries segment.
Moreover, it's worth highlighting that the profit surge within the resource industries segment significantly contributes to Caterpillar's overall performance. The increase in profit within this segment surpasses half of the profit increase observed in the construction industries segment between 2021 and 2022. This underscores the cyclical nature of the resource industries segment and underscores just how much it can enhance profitability when its end markets are in a favorable state.
Komatsu is a direct competitor of Caterpillar in the construction and mining machinery sector. Recently, Takeshi Horokoshi, the CFO of Komatsu, conveyed to the Japanese newspaper Nikkei that there are no signs of a slowdown in demand for mining equipment. As a result, he indicated that profit growth for 2023 would surpass previous forecasts, with the company implementing price increases in response to the robust market conditions.
This positive outlook from Komatsu is undeniably encouraging for Caterpillar's mining machinery sales in the third quarter.
Before delving into this further, it's worthwhile to revisit what Komatsu disclosed during its second-quarter earnings presentation at the end of July, as it holds favorable implications for Caterpillar.
Komatsu provides comprehensive guidance, breaking it down by geographic end markets and mining equipment sales, offering valuable insights for Caterpillar investors.
As illustrated below, the guidance for overall demand for construction and mining equipment in North America remains unchanged for 2023, as does the guidance for mining equipment. In fact, Horokoshi's recent comments suggest a strengthening in demand for mining machinery.
Conversely, there has been a notable weakening in overall demand in Europe and China, according to the trends outlined in Komatsu's guidance.
If Komatsu's observations regarding the mining machinery end markets prove accurate, Caterpillar could be in for a strong year in its resource industries segment. Meanwhile, Caterpillar's energy and transportation segment, encompassing oil and gas, power, industrial reciprocating engines, turbines, compressors, and diesel-electric locomotives in transportation, should experience robust demand from the buoyant energy and power sectors.
This brings us to the construction industries segment, where the situation is somewhat mixed. Demand conditions in North America remain stable, but according to Komatsu, conditions are deteriorating in Europe and China. Collectively, Europe, Africa, the Middle East (EAME), and the Asia/Pacific region (including China) accounted for approximately 36% of Caterpillar's construction industries sales in the second quarter. It's reasonable to assume there could be pressure on the overall segment.
The global economy is currently navigating through some cyclical weaknesses, and it's difficult to imagine that Caterpillar won't be affected to some extent. Nevertheless, the strength in mining machinery and the current stability in North American construction suggest that Caterpillar, as an industrial company, is relatively well positioned to weather these challenges while awaiting a lower interest rate environment to stimulate growth.
While the price is above 272.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 279.50
- Take Profit 1: 287.50
- Take Profit 2: 292.00
Alternative scenario:
If level 272.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 272.00
- Take Profit 1: 265.00
- Take Profit 2: 262.00